China and the World of Business • China Business and the World

Category: Film

A few weeks ago, we noted that the growing phenomenon of microfilms – motion pictures produced inexpensively with digital technology and distributed online – was becoming too popular to long avoid the attention of regulators.

This week’s update of a two-year-old regulation on the supervision of online dramas and microfilms has raised fears of stifling creativity. The broadcast administration now requires content makers to register with their real names, production companies to obtain operating licenses and report their content before it is put online, and video-hosting companies to keep records of uploaded content.

This places microfilm producers in one of two boxes: they will either be legit, or they will go guerrilla, and if they do the latter, the best avenues of distribution will be closed to them. Of all of the regulations, the last is the kicker. Video hosting companies, who thrive because the government chooses not to look too closely at whether their most popular content has been approved for broadcast, will anxious to avoid antagonizing their regulator.

Depending on how stringent the regulations are and the spirit under which they are enforced, there are two likely outcomes to these regulations: a vastly larger and more creative film industry; or the world’s largest guerrilla film market. If the government simply uses the licensing regime to turn microfilms producers into legitimate small businesses, they create a tax base and the wherewithal to fill the digital pipeline with legitimate, local entertainment. They also take a step toward turning China into the global film powerhouse the government aches to create.

At first blush, this outcome seems unlikely: why regulate if you are trying to grow an industry? In China, though, because a business license is granted for one or more specific activities, the act of regulation actually creates a channel to legitimize a business, and thus afford it the ability to operate above board. Further, if the government only requires “reporting” of content and not approval prior to posting, this alone represents a major step for filmmakers.

Even under such a regime, the government will continue order the removal of any film that steps beyond the bounds of Party propriety into forbidden topics or prurient content. That door of control remains open to them, as it is today.

If, on the other hand, the government is niggardly with microfilm licenses, or if it lays upon producers onerous approval requirements as a part of the reporting process, the result will be a community of guerrilla filmmakers and sites that distribute their works. At that point, there will be no regulating the content, and filmmakers will feel free to take on even themes that would discomfit the party.

Under a draconian implementation of these laws, distribution will not stop: it is, actually, easy to envision people sharing forbidden films via email, torrent, thumb drive or other means, from person to person, much as samizdat literature did in the Soviet Union during its final decades.

The rational choice seems to call for a robust, regulated film business that builds China’s soft power and draws its eyeballs away from foreign content. We will know within six months how this will all shake out.

I read today with great interest Louise Watt’s superb AP story about microfilms, a new medium emerging at the intersection of online video, mobile media, and digital filmmaking. Louise explains how microfilms are growing in popularity in China.

What Watt touches, and fortunately does dwell upon, is how microfilms are still quite experimental in the PRC. Beyond the artistic sense, that means that there are no laws, regulations, or administrative rules in China that officially recognize microfilms as a medium, or that provide an official framework for their creation, distribution, and consumption. In most of the world, this would mean nothing. In China, it establishes the arc along which microfilms are set to develop. Or not develop.

A Different Media Market

By definition in China, the media is controlled by the Party. As such, media implicitly plays a different role in Chinese society than it does elsewhere: it performs the function that the Party sees fit.

And media is seen by the Party, first and foremost, as a tool of social administration: a means of communication between the Party, via the government, to the people, designed to support the Party’s goal of sustaining social harmony and support for the Party. Only after that is it seen as a means of conveying entertainment to the people, or as an industry to employ people and generate economic activity.

The mainstream media – newspapers, magazines, books, recordings, live performances, radio, film, and broadcast television – all began in post-revolutionary China in organizations controlled by the state. State control was axiomatic, and the Party created – and later, vetted – all content.

But when new media began emerging to challenge the state’s media monopoly – starting with cable and satellite, but soon moving on to the Web, games, blogs, and social media – the state made it clear that it saw these as subject to its monopoly, whether by licensing or by direct control. It seems unlikely, therefore, that microfilms will escape official notice and regulation.

The Coming Reckoning

So how will this roll out for microfilms? There are two likely outcomes. On the one hand, if the organs of the State Council and the Party Publicity Committee approach them as an undifferentiated part of the mass of videos finding their way online in China, microfilms will ride along with whatever the future is for online video as a whole.

But if those government and party offices for whatever reason decide to see microfilms as a separate development – especially if they become a real, vibrant threat to the growth of China’s mainline film industry, or if they become an outlet for political angst – then microfilms will be treated as a new medium, and they will face turbulent times.

In China, the government tends to go through four stages in the journey to legitimizing a new medium. This is not a formal process as much as it is a modus operandi, but it has been remarkably consistent over the past two decades.

Ignorance – First, the government will decline to pay official attention the microfilm phenomenon. It will, instead, take a stance where it officially ignores the media, all while watching it out of the corner of the eye. This tacit approval allows the government to wait, watch, and bide its time before stepping in.

Reaction – Finally, when somebody makes and distributes a microfilm that crosses an invisible political line and causes an uproar, the government will be left with no choice but to step in and take action. The move will be to slam on the brakes, possibly making the production and/or distribution of such films illegal, and ordering sites like Youku and Tudou to cease production and distribution.

Experimentation – When the government acknowledges the benefits of microfilms (assuming that it sees them,) it will begin a gradual process of experimentation. That might developing a licensing regime and framework that will ensure the films support – or, at least, do not operate in direct opposition to – the state. Alternately, the government could mandate that all microfilms are only distributed through government-approved sites. In the worst case, it would restrict the production of all such films to state-owned entities. Either way, the process will forge a sustainable framework under which microfilms can be made in China.

Accommodation – Once the framework is in place, the government enters a phase of fine-tuning that system, opening it up to more participants, or to less, or under different conditions.

Softening the Blow

It is important to remember that at any of these stages, there is room to influence the process, to soften the government’s approach. The degree to which this is successful depends on the unity of the participants in the process, and the level of self-regulation (read “self-censorship”) the parties are ready to engage in.

For many media – blogs, microblogs, and other user generated content – the process of reckoning with these developments saw the government turn to the platform owners to control the content. The platform owners, in turn, subjected users to rules that would see their content deleted and accounts closed if they posted political or prurient content. That allowed for a relatively easy solution.

If the distribution of microfilms remains limited to sites like Tudou and Youku, the government may not see a need for much further regulation – the authorities already have clear understandings in place with the online video sites, and keeping track of the few dozen microfilms each week is a simple matter.

But the prospect of getting a large group of producers and directors of these films to sign up to a means of self-regulation seems slim, and if distribution goes outside of those channels that the government can control – if peer-to-peer sharing kicks into high gear, for example, the regulation will have to happen at the source. And the government will have to make its controls draconian to enforce control on people making movies with phones, handhelds, and laptops.

Media will Serve

The Party’s broader policy direction of late does not seem to augur a greater opening to ideas and an independent media industry, even though the past twenty years have proven to China’s leaders that absolute control in an age of user generated media is practically impossible.

But when the government needs to use media – including its policies on its use – as a means to sustain social stability, regulators see it as their duty to ensure that media serves the needs of the state. As flexible as the medium may be – and microfilms are an exercise in flexibility of topic, format, creation, and distribution – the government has proven itself increasingly deft in crafting regulatory regimes that permit new media to operate on the Party’s terms.

At some point, microfilms will face a reaction. What filmmakers have to do is decide whether they want to avoid that reaction – or provoke it – as a pathway to a stable, legitimized future, or to another kind of future entirely.

China has made few concessions to the U.S. in the effort to gain more access to Chinese audiences for Hollywood films of late, and no significant concessions since China’s accession to the WTO. Then, on a U.S. visit in February, Chinese Vice-President Xi Jinping told U.S. Vice-President Joe Biden that 14 additional films would be allowed into China each year. The catch: they had to be either 3-D or IMAX pictures.

The reasoning behind this concession is not hard to surmise: the number of Chinese cinema screens has leapt to 11,000 screens after languishing for over a decade at around 3,000 screens. Why the boom? Simple: China’s hyperactive real estate developers have begun including cinemas in their commercial, retail, and mixed-use complexes throughout China’s 600 cities. Cinemas, apparently, attract the kind of foot traffic that supports retail business. Those developers wield considerable political influence, and they want more foreign films because in order to fill the seats.

Across the proverbial table are the party ideologues and China’s own film production industry whom, after decades of effort, are just starting to see Chinese going to the cinema in droves, and increasingly to see Chinese films. They don’t want to give it all away just as they’re capturing the market.

Enter 3-D.

There are over 7,000 screens in China that are 3-D capable, yet only a tiny number of Chinese films produced each year can take advantage of that additional investment. For the government to allow access to 3-D films was almost cost-free: it made the developers happy without upsetting the film industry.

This is going to be a good thing for Hollywood as well, but we must hope that the MPAA was not expecting any further 3-D slots beyond what has already been granted. Any hope of that was dashed last week by none other than James Cameron.

Mr. Cameron, the mercurial director of “Terminator,” “Titanic,” and “Avatar,” announced on August 8th that it would set up a joint venture with the Tianjin government to produce 3-D films and television content. In short, Mr. Cameron proposes to teach Chinese filmmakers how to make 3-D content of their own.

As I’ve noted before, China’s goal is neither to partner with the U.S. in the movie business, nor focus exclusively on its large and growing home market. China – and by that I mean not only China’s film industry but also the central government and the Communist Party – has every intention of competing with the U.S. and European film industries globally and, if possible, beating them. It is only realistic to see any partnerships with and concessions to Hollywood in the light of that effort.

One hopes Mr. Cameron understands his role in The Big Picture: China will happily use the Cameron Pace Group as a means to learn how to make fantastic 3-D content. Once that is done, Chinese 3-D filmmakers will not only be able to fill the growing number of 3-D cinemas at home, they’ll come gunning for Hollywood in its own increasingly-essential overseas markets. Cameron Pace may make a lot of money, or it may not. It will certainly make a competitor for Hollywood in 3-D.

Mr. Cameron may not mind: he’s near enough to the end of his storied career not to care. At the same time, you have to wonder how the students at NYU, USC, and the Directors Guild might feel about it.

The deal is interesting for several reasons. First, it marks a strategic departure for News Corp., which has in the past preferred to own larger stakes in its China ventures. It is also the first major investment News Corp. has made in traditional media since 2006, when CEO Rupert Murdoch told a meeting of industry executives in New York that he’d hit “a brick wall” in China.

Second, it is interesting because News Corp. is now leading from behind in China, preferring to play a fast second rather than trying to beat the rest of the industry. Similar linkages between Legendary Pictures and Orange Sky Golden Harvest, DreamWorks Animation and Shanghai Media Group, and Walt Disney and the Ministry of Culture/Tencent have been announced over the last year.

Despite some secrecy around specifics of the deal and Murdoch’s real intentions behind it, the move represents a wiser China strategy than News Corp.’s previous, dingo-in-the-butcher-shop approach. The history of foreign business in China has been dominated by a preference for speed over calculation: if we don’t get in early/first/biggest, the thinking went, we have no chance of success. It now seems that Murdoch has learned from costly experience the fallacy of such thinking, and now that Legendary, DreamWorks, and Disney have paved the way, he has followed.

Neither News Corp. nor its CEO have been idle these past six years, either. A quiet charm offensive has apparently been underway for at least the past two years, a period during which I think News Corp. has done a lot of listening and learning, understanding what is possible and permissible for a foreign media company here, and calibrating its ambitions accordingly. Many whom have dealt with the News kraken or one of its tentacles can attest that this is an uncharacteristic approach: normally it is News that defines what is possible in a given market.

I suspect, therefore, that this is a first step for News with Bona, and that we can expect the relationship to mature and expand based on the signals that come from the Party and the market in the next several years.

“The Hunger Games” is apparently scheduled to show in China, according to this piece (h/t to Jacqueline in HK, aka @lantaumama for this.)

This movie, based on the first book of a trilogy telling the tale of a hardy young woman who inspires a rural uprising against a brutal repressive urban dictatorship, will either be pulled at the last minute when the censors actually WATCH the darn thing, or it will be the most subversive piece of democratic propaganda ever to sneak onto Chinese screens.

Or, as occasionally happens, the Chinese audience will take something entirely different from the experience than we would.

Image via Wikipedia

Either way, it will be fun to watch what happens.

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It was one of those temporal ironies that remind me that the Almighty (or Chance, for you secular humanists out there) has a sense of humor. Not long after I wrote a post warning Hollywood to use care in its dealings with China, Legendary Pictures announced that it had accepted a strategic investment for 3.3% of the company from a subsidiary of Orange SkyGolden Harvest Entertainment.

What makes the deal even more fun here in the Hutong is that my brother-in-law is on the executive team at Legendary. But let’s set that aside for a moment.

Nikki Finke over at Deadline.com does a writeup of the details, so I won’t dive too deeply into the nuts and bolts, nor will I wax poetic about Legendary’s successes. It is worth noting, however, that Legendary’s fare has a Chinese audience: their most recent hit, Inception, recently took in over RMB200 million at the Chinese box office.

Relationships aside, I expect the deal will avoid the tripwires I outlined, for several reasons.

Legendary is a production company rather than one of the big studios. Washington is unlikely to raise an eyebrow.

While the amounts involved were not disclosed, logic and experience suggest that we are not talking billions of dollars in paid-in capital. This is a “toe in the water” for all involved, an opportunity to get to know your partners while the stakes are low.

The investment is for a very small stake – this is more about strategic opportunity than control over content.

In fact, I expect this deal to be widely imitated: production houses that are not already looking for Chinese partners will start hunting, and Chinese film entities will now follow their cultural instinct to Keep Up with the Zhous by looking for similar tie-ups.

Therein lies the caveat: it is in the predictable imitative that reason lies for concern. If further deals match the modesty of the Legendary OSGH tie-up, and the partners remain as overtly commercial as Golden Harvest, the China-Hollywood link will build without outside interference.

But if the pace of deals grows too quickly in frequency and/or size, it will elicit a response that will serve neither the industry nor the companies well. In any case, firms on both sides of any deal need to be transparent about the rights and powers granted to each partner in the tie-ups. More important than confidentiality in these cases is the comfort of the governments and movie-going publics in the U.S. and China with the closer relationship between the two industries.

“There’s a saying that Hollywood is the real foreign ministry of the US, which shows the importance of the movie industry.

From a cultural perspective, the promotion of the movie industry is an important way to strengthen the soft power of our country.”

We have made this point before, but it bears repeating. The Party and the government have three identical goals for each of the media and cultural sectors. In the case of film, they are:

To construct a commercial cinema industry that dominates the domestic market for filmed entertainment, regardless of means of distribution.

To then build China’s local film industry into a major generator of export dollars by creating motion pictures with international appeal and wide distribution.

To generate soft power by using motion pictures to convey positive and appealing messages, images, and impressions about China, the Chinese people, and Chinese culture to international audiences.

Against this, the seemingly contradictory articles in the WaPo and the Guardian both make sense. Chinese filmmakers seek to build ties with Hollywood that can help make use of major U.S. motion pictures to convey positive images and impressions about China, to better learn the “mojo” that makes Hollywood America’s shadow foreign ministry, and then (hopefully) to duplicate that success as a global competitor to Hollywood.

Hollywood – and in this I mean the major studios – walks a fine line in dealing with China, not only in that it is potentially forging a competitor in Hollywood’s increasingly critical international markets, but also in that such chumminess could undermine the industry’s “American-ness” in the eyes of legislators in Washington and audiences across mainstream America.

If the hysteria after 9/11 demonstrated anything, it is that the spirit that birthed McCarthyism lies dormant in the American polity, awaiting only a crisis or catastrophe to wake it again. In an era of Tea Parties, Hollywood needs to move with care and caution as it engages filmmakers who operate at the whim of Zhongnanhai.

And if the past three decades in China have demonstrated anything, it is that western companies who have invested in China have been most successful at manufacturing their own competition. The Chinese government and its interlocutors like Xiang Yong have put Hollywood on notice that they are next.

Keith Richburg and Zhang Jie wrote an enjoyable piece in The Washington Post about the different ways in which the U.S. film industry is seeking to tap China. The article is encouraging in that it suggests that Hollywood is getting over its blinkered view of China as a really big version of France (big market, different language, resists our product, resistance is futile, will eventually be assimilated.)

The article notes that product placement, scripts (read “story ideas”) and locales have made China more interesting to Hollywood. There is even a bit about the importance of “co-productions.”

It’s Spelled O-P-M

The biggest attraction, however, is cash.

For Hollywood, the reason for the sudden interest in China might be described as more mercenary. Hollywood traditionally runs on other people’s money – and China has a lot of cash to spread around these days.

Our favorite films notwithstanding, Tinseltown’s most remarkable achievement is its consistent ability to get outsiders to fund a business that is as unapologetically opaque as it is inherently risky.

In succession, Hollywood has tapped (and tapped out) Main Street USA (Gulf & Western, Kinney, Coca-Cola, General Electric), Main Street Japan (Matsushita, Sony) Main Street Europe (Vivendi), and Wall Street (take your pick of hedge fund and private equity-funded film partnerships and virtual studios). In the wake of the financial crisis and the drying of the Wall Street wells, the emerging markets were a logical next target.

It took someone with the foresight (or desperation) of Stephen Spielberg to lead the way. Spielberg, a producer/director not normally associated with low-budget, high-return films, began the trend when he longtime collaborator Stacey Snider closed a $1.2 billion deal with India’s Reliance ADA Group to produce six films a year.

Barring an abrupt change in the mood on Wall Street, China looks to be next to fall into the celluloid web.

Or is it?

I’m Ready for my Closeup Now, Mr. Lou

Hollywood’s major studios and their affiliated production companies need literally billions of dollars a year to finance slates of films costing upwards of $100 million each to produce and market. There are a very limited number of entities in China capable of investing at that scale: the major state-owned banks, China Investment Corporation, and a handful of large state-owned industrial companies.

And while the leaders of those firms might well be attracted to Hollywood’s glamour, the Industry’s need comes at an inopportune time. CIC’s large paper losses in Blackstone Group caused an uproar, and the financial crisis has placed the stewards of the people’s funds under uncomfortable scrutiny at home. Senior cadres can well imagine the popular backlash that would occur if it were to become known that national wealth was lost investing in Hollywood flicks, and would be anxious to avoid such a scenario.

It is also instructive to remember the popular consternation whipped up in the US when Japanese keiretsu began to invest heavily in Hollywood. That storm would be a squall compared to the typhoon of opposition and angst blowing out of all corners of the US if a Chinese government-owned entity attempted to buy into Hollywood. Hollywood’s leaders need to think carefully about whether they want to fritter their political capital in Washington on such a quest.

None of which is to suggest that China will stay out of Hollywood: the kind of picture-by-picture deals that the WaPo article alludes to will continue and grow, and I think we can expect slow but growing connections between the US and Chinese film industries.

But we would be wrong to forget that the dynamics driving The Biz in the two countries are vastly different, as are the cultures they are spawning, and that it is a sizeable leap from an increase in co-productions to China replacing Wall Street as Hollywood’s Sugar Daddy.

While I was absorbing caffeine and beta carotene at a sunny Beverly Hills espresso spigot earlier this month, I came across a superb article in the Wall Street Journal explaining how the U.S. motion picture business is starting to make films that are aimed at an international market. The phenomenon has reached such a stage, in fact, that movies ONLY likely to appeal to a domestic U.S. audience are not getting the green light, and those films deemed promising but too US centric are being given script and casting makeovers to make themselves more appealing to international audience.

Darn those Foreigners Paying to See Our Movies!

About time Hollywood woke up to the rest of the planet, I say, but writing in The City Journal, New York’s local Neoconservative periodical, author Andrew Klavan apparently thinks otherwise. He suggests that the reason there is such poor fare in the theaters this summer is because Hollywood is spending too much time making movies for the rest of the world, and not spending enough time making American Movies.

“…perhaps the economic necessity of appealing to countries other than America has sapped American movies of their quality. For surely, the thing that once made American movies so great was the greatness of unique American values: individualism, self-reliance, a healthy disrespect for the powerful, and the romance of infinite territory.”

And it gets better (or worse:)

“American movies will not be great again until they’re made by artists who comprehend America’s unique greatness. Let the rest of the world make its own movies.”

Klavan’s xenophobia-suffused, evidence-free rant is unbecoming of a journal that one would think advocates the competitiveness of American enterprise abroad, in particular an industry as important to U.S. export numbers as film and entertainment. Let us take a look at why.

This Year’s Movies Are The Worst…Again

First, the summer is not without some fine examples of filmmaking. I saw four films while I was in the US, all dictated by the tastes and sensitivities of my eight-year old: “Toy Story 3,” “The Last Airbender,” “Despicable Me,” and “Cats & Dogs 2: The Revenge of Kitty Galore.” The first was superb, the second tolerable, the third excellent, and the fourth…well, let’s just say the kid really enjoyed it. It is a limited sample, I will grant, but it does not seem to imply that the US industry is incapable of making great films.

And the stream of complaints about the “garbage” coming out of Hollywood predates the establishment of the Motion Picture Production code of 1930. Hollywood turns out its share of dreck (as does Mr. Klavan’s own industry, publishing), but suggesting that somehow that Hollywood’s Crap Coefficient has increased of late without providing anything more than a single anecdote is a failure of logic. To go even further and offer a reason for such an unproven phenomenon is plain nonsense.

I think Hollywood actually goes through cycles, and is not on one-way elevator to Hell. Just as soon as people lose their tolerance for big-screen sludge, corrective action will be taken. It is worth noting, however, that usually the people decrying most loudly the poverty of what gets produced in Hollywood are those who either see themselves as artists rather than makers of commercial films, and those whose pictures get overlooked by The Dream Factories. It is hard, therefore, not to sniff the vintage of sour grapes in Mr. Klavan’s dismissal of recently released motion pictures.

America Alone Makes No Blockbusters, And That’s Good for America

Second, the lurch overseas is a good thing, both for Hollywood and America. As Mr. Klavan implied, the reason Hollywood makes the movies that it does (and by this I mean Big Hollywood: Columbia, Disney, Fox, Paramount, Warner Brothers, and Universal) is because the town has become addicted making their major bets on “tentpole” films. These large- and super-sized-budget films are believed to be necessary in order to get American viewers out from behind their small screens and over to a multiplex. That, in turn, has led to budgets so large that even a decent US showing with tickets selling for upwards of $10 a pop is no longer enough to deliver profits to the studios. With DVD sales flat or shrinking, there is only one place for a healthy American industry to go: overseas. Mr. Klavan and I both understand this “economic necessity.”

But here is where Mr. Klavan and I part ways: this trend is unlikely to cease, and I don’t think it should. From a purely American/Hollywood point of view, is it in fact better to let the world make their own movies? National motion picture industries around the world have followed similar patterns, but the result for most has been to surrender a lucrative chunk of their markets to American filmmakers. Those that have succeeded in making movies for themselves – like China and India – seek now to create global audiences for their own fare, reaching into Hollywood’s own back yard, much in the way that Britain’s better filmmakers have done.

General Motors, Ford, and Chrysler for many years focused their efforts on building American cars for American drivers, cars that expressed values believed to be uniquely American. The result not only clear on the roads of the world, but on America’s roads. Does Mr. Klavan wish the same outcome upon Hollywood as upon Detroit?

Time to Really Split Hollywood

As with the writings of Karl Marx, I don’t disagree quite as much with the writer’s observations as I do with his diagnosis and perscription. The real solution to Mr. Klavan’s conundrum is to recognize that there should really be two Hollywoods: one that makes movies for the world (including Americans), and one that makes movies for Americans.

The former would continue in the industry’s proven ways, spending heavily on films aimed at a worldwide audience, including (one presumes) the United States. This is where I suspect the Big Six studios, the membership of the Motion Picture Association of America (MPAA) to focus most of their efforts, endowed as they are not only with the financing and production resources, but also highly developed global marketing and distribution networks.

The other Hollywood would make movies for Americans, but because it was addressing the specialized needs of the U.S. market (and the remainder of the moviegoing dollar after Americans had enjoyed the global flicks). The budgets would be much more modest, the marketing more guerrilla and less major media. The MPAA members might make some of these films, but most of them would come from independent filmmakers.

One could argue that Hollywood is actually already moving in this direction now. What it is going to take to complete that migration into two parallel industries is much more vocal support for independent filmmaking from influential voices in the industry and from the movie-going public. With more public support for independent film, financing and distribution could give what Mr. Klavan would call The American Film a fighting chance in an increasingly global industry.

However the present trend shakes out, one brutal fact must be acknowledged: the films of the sort that Mr. Klavan once made cannot be delivered with eight-figure budgets. If the heyday of The American Film is to return, then the makers of those films must rediscover a treasured but nearly lost American virtue: thrift. As a fellow conservative, I find it disturbing that Mr. Klavan is silent on Hollywood’s budgetary profligacy even as he skewers the Administration for the same failing. I would argue that the sheer cost of making a movie has already done more lasting damage to the industry than catering to global audiences ever could.

As China’s film industry struggles to turn itself into a real industry (rather than a government-sponsored propaganda tool-cum-art form,) producers and filmmakers are searching for near- and long-term sources of finance and distribution. Seeking new models with which to finance China’s growing film biz, the gaze of mainland producers naturally turns to markets outside the mainland.

A Bunch of Cash Holes

What they find is that the entire global industry is engaged in the quest for new sources of cash. Even people like Steven Spielberg and Ron Howard, bankable filmmakers both, are finding that it is harder than ever to get the money they need to make their films. Spielberg has not only had to cut a long-term distribution deal with Steve Jobs’ crew over at Disney, he has had to go to India’s Reliance BIG Entertainment for cash as well.

Spielberg’s hunt for production money is a symptom of a wider contagion that has affected the film business. Production costs continue to rise, digital revenue is not ramping up as quickly as is we had all hoped, and younger audiences are spending more time online or playing games. More immediately, the financial crisis has meant that the usual sources of cash have either slowed or evaporated.

All is not gloom, though. For several years now, a new crop of film finance companies pairing hedge funds and private equity directly with producers has not only given Hollywood a much-needed new conduit of cash, it has in some cases brought a more bottom-line approach to production. (Full disclosure: my brother-in-law is an executive at one of these companies.)

A New Kind of Mogul…

At first glance, one of the most intriguing examples of the type is Relativity Media, profiled in this month’s Esquire magazine. The article sounds a hopeful note, positioning Relativity and its 34 year-old leader, ex-venture capitalist Ryan Kavanaugh, as honest water merchants in an increasingly dry land.

Relativity appears to do some smart things. They focus on getting movies made, not optioning a hundred properties and turning one into a film. They ensure costs remain in line with good business sense. They try to earn profit by being sensible about costs and distribution, not trying to make blockbusters.

…Or Just Another Old Quant?

I was really prepared to put Kavanaugh into my pantheon of people who are building the future of Hollywood. But when I got down about two-thirds of the way through the article, things started to go a bit awry. I think this was the paragraph that set off the alarm bells:

“Before Relativity commits to financing a particular movie — either through its slate deals with Sony and Universal or on its own — it’s fed into an elaborate Monte Carlo simulation, a risk-assessment algorithm normally used to evaluate financial instruments based on the past performance of similar products.”

Now, I am nobody’s idea of a “quant,” but neither am I the anti-quant. I like playing with spreadsheets and plugging in assumptions and variables a lot more than I like to admit in polite company. I also think there is a dearth of analytical, quantitative thinking in creativity-driven businesses.

So I like the fact that Kavanaugh and Relativity are trying to bring the sensibilities of management accounting to Hollywood. The future of film is not the subordination of art to business, but the quest for an equitable balance. Kavanaugh’s bottom-line focus while rising above gratuitous bean-counting is a step forward in this regard.

Yet while Relativity would protest that only a part of their decision-making is driven by their computer models, I see cause for concern. Basing investment decisions using computer modeling based on past performance or market behavior is a riskier proposition than the quants might have you believe. Long-Term Capital Management leaps to mind, as do a half-dozen major financial organizations that have similarly vanished into clouds of hubris in the past year.

The Black Swan Cometh

In the entertainment industry, where tastes and media consumption are in the throes of massive change, common sense demands we be especially selective about using the past as a guide. What is the half-life of a set of audience assumptions in a single market like the US, then multiply that across the worlds markets, from whence comes 2/3 of the average film’s revenue.

If, on the other hand, the company’s investment decisions are driven by the knowledge and instincts of its executives, it is likely making decisions on a basis little better than anyone else in Burbank, Santa Monica, or points between.

Relativity may have convinced themselves that the modest goals of their approach (“don’t lose your shirt”) are enough to stave off an unforeseeable catastrophe – a major box-office flop, or even several in a row. If so, I think they are kidding themselves. The recent history of the finance industry has proven that betting your money on the mathematical rationalization of the irrational behavior of millions of decision makers is pure folly.

All of which is why I hope that, despite Relativity’s apparent success to date, we in China decide to eschew such an approach to film finance, at least for the time being. There are far too many more fundamental steps that the industry here could be taking to improve its bottom line and its box office performance.

CORRECTION

Seeking Alpha reader and film executive Andy Almay noted that I my characterization of Spielberg going to Relativity was in error:

“Spielberg didn’t go to Reliance. It was the other way around. Reliance wanted to buy into Hollywood. They also made deals with a number of name performers and down the line they may rue the day. Performers have been notoriously bad at picking successful projects.”

The point, though, remains. When the man who is arguably Hollywood’s most successful and esteemed producer needs to turn some of his creativity to fundraising, all producers will need to do more of the same.

The executives, all in their “20s and 30s,” were given lectures and workshops by some of the leading lights in Hollywood, each clearly motivated as much by a desire to crack China as any thought of helping the youngsters.

But the money quote was not delivered by Dan Glickman of the MPAA, Mike Simpson from William Morris, or even Gareth Wigan, the former vice-Chair of Sony Pictures and one of Hollywood’s leading globalizers.

No, the quote of the day was delivered by one of the young Chinese executives:

“When the floor opened for questions, the Chinese had questions of a different sort…Another wondered how Chinese films could find a global audience when American viewers continue to reject subtitles. ‘Americans are spoiled,’ the questioner complained.”

Moviemaking would be great if it weren’t for that darned audience

Without arguing the speaker’s point, he calls our attention to the real core of China’s global box-office problem.

The gap in quality of material and production values between Chinese films and big-budget western productions is still significant, but it is declining. The quality of China’s leading productions easily matches that of some of the more popular independent films in the United States.

But for all of the improvements on the production side, Chinese film executives have a lot to learn about marketing – especially international marketing. Rule one, of course, is that blaming your target customers for your failings is a fig-leaf for incompetence.

One of the core differences between the film business in China and that in the United States is that the US industry is at least nominally driven by what people want to pay to watch. The result is a lot of dreck, of course, but dreck that at least has a shot at making some money.

Chinese film, on the other hand, is dominated by the creative conflict between filmmakers and regulators, the latter acting on behalf of party ideologues. There is precious little room in that clash of power and ego for the voices of executives speaking on behalf of the ticket-buying audience.

So despite the best intentions of Robert Rosen, dean of the UCLA School of Theater, FIlm, and Television, and China Film Group’s urbane vice-chairman Jiao Hongfen, one does not hold out much hope for improved prospects for Chinese film in with significant masses of non-Chinese moviegoers.

In the Hutong
Ignoring American Idol while the Party Secretary watches
0001 hrs.

Wendi Deng has told Vogue that she will be collaborating with her pals Zhang Ziyi and Florence Sloan to establish a new film production company based on the DreamWorks model. The first project of the unnamed venture is apparently an adaptation of Shan Sa’s novel The Empress, and Ms. Deng dropped the name of Ridley Scott as a possible director.

Let us set aside for a moment the fact that DreamWorks SKG was built on the collective talent, track records, and Hollywood street credibility of Steven Spielberg, Jeffrey Katzenberg, and David Geffen. Ignore for a moment that whatever the strengths Deng, Zhang, and Sloan bring to the table, they are simply not in the same league as the the DreamWorks founders. All of that doesn’t matter: with the support of Rupert’s money and Zhang’s screen success, they will likely get some movies made.

You may also remember that MySpace China was publicized as Ms. Deng’s deal. From Joseph Kahn’s piece in The New York Times last June:

Wendi Murdoch has stepped up her role in China. She plotted a strategy for the News Corporation’s social networking site, MySpace, to enter the Chinese market, people involved with the company said. The News Corporation decided to license the MySpace name to a local consortium of investors organized by Ms. Murdoch.

There is a pattern to all of this, an internal logic.

Ms. Deng is not a News Corporation executive. She plays no official role in the business. When she helped put together the MySpace China deal (assuming, of course, that her participation was real and not some form of positioning), she was basically doing it as The Boss’ Wife, as News Corporation laobanniang. That would probably rankle anyone who had an MBA from Yale and a little ambition, so it probably rankled Ms. Deng.

The venture with Zhang and Sloan – let’s call it QueenWorks – gives Ms. Deng more than a project on which to occupy her time. It is her first real job since marrying her husband, and her first shot at running her own gig. It is also her shot at a lasting piece of the action, a legitimate business she can build independent of News Corporation that she can use as the foundation of her own media organization. It makes her something more than Mrs. Murdoch, and yet she carries that cachet into every meeting she walks into.

Providing she is serious about it, providing it is not simply a toy for a bored wealthy housewife, she could actually make something out of the organization. Either way, what we will have will be a litmus test: given a wealthy backer (her husband) and interesting partners, is Wendi capable of running a successful business?

This is an important question to News Corporation. If Wendi can prove herself an able executive in her own Hollywood operation, it gives her considerably more credibility at a later date when the complex issue of Rupert’s succession comes up. It is one thing for the spouse of the boss to seek a role in the business. It is another entirely when that spouse also has made her bones as a successful businessperson.

The Hollywood Reporter, long essential morning reading for the entertainment industry in the United States, Europe, and elsewhere, has had permanent roots in China for a couple of years now, with an official bureau led by Jonathan Landreth. The THR staff have provided a much-needed addition to the coverage of the music, film, television, and new media industries here in China. With occasional exceptions, however, much of the fine reporting coming out of THR in China has been trapped behind a firewall.

That all changed today, when THR launched The Hollywood Reporter Asia, a website that not only allows us to see the superb coverage coming out Jonathan and his team here in China, but also regional and global industry news. One other thing I really like about THR-Asia is that it is edited right here in Beijing, underscoring Beijing’s growing role as the media center of the region.

Give it a look. Personally I’m adding it to Danwei.org as part of my daily routine. If I have one quibble, it is the lack of an RSS feed, but I understand that with THR offering their content for free, they want you in the site for the ads. A small price to pay.

Whatever you may think about the relative merits of entertainers leaping from the screen and onto the world stage, we were treated this week to a profound contrast in the styles and approaches of two young actresses.

Exhibit A is Marion Cotillard, the 32-year-old French actress who won the Academy Award for Best Actress a little over a week ago for her apparently inspired performance as Edith Piaf (yes, I too am a philistine and had to Google it) in La Vie en Rose. In an interview from a year ago broadcast on a French website, she proclaimed that the 9/11 attacks were a hoax manufactured by the US government for political ends, and that the twin towers were demolished because they were obsolete.

Without supporting or debating the veracity of Ms. Cotillard’s claims, suffice to say that we here in the Hutong appreciate a good conspiracy theory in the same way we appreciate good science fiction – great stuff with which to tickle the frontal lobes, maybe even ask a few hard questions. But as most bloggers learn fairly quickly, when one takes a public stand that is in direct opposition to popular perception, one had best be very, very sure of one’s facts and be prepared to support one’s stand through effort and action. Sadly, Ms. Cotillard goes no further than voicing an opinion that begs for support.

“My visit left me even more deeply convinced that we not only have a moral obligation to help displaced Iraqi families, but also a serious, long-term, national security interest in ending this crisis.”

She continues:

“As for the question of whether the surge is working, I can only state what I witnessed: U.N. staff and those of non-governmental organizations seem to feel they have the right set of circumstances to attempt to scale up their programs. And when I asked the troops if they wanted to go home as soon as possible, they said that they miss home but feel invested in Iraq. They have lost many friends and want to be a part fo the humanitarian progress they now feel is possible.”

Her conclusions are hardly those of an expert, and her focus is exclusively on the issue of the 2.5 million Iraqi refugees for whom she seeks repatriation. More than one pundit has questioned her qualifications to speak on behalf of all of the troops deployed in Iraq. Nonetheless, they are startling because they come from an unexpected source, and because of the inevitable reverberations they will send through celebrity salons on both coasts – not least the circles in which she and husband Brad Pitt circulate.

(For the record, I don’t feel qualified to make a call on Iraq either way, so I won’t.)

Again, leave aside your own opinions on the specific matters at hand. To me what is germane is the difference in approach. Two young women, each given the opportunity because of fame earned on the screen to voice their opinions on larger matters to their audiences, chose to make use of their bully pulpits in incredibly different ways. One chose to make the kind of flippant, uninformed remark more appropriate to a conversation with close friends. The other chose to take the time and risk to journey to someplace she could learn more, then share her thoughts and findings – whatever they’re worth – with others.

Regardless of what you may think about Ms. Jolie, her motivations, the appropriateness of her remarks, or her qualifications to even make them, you must applaud her quest to learn a little something of the subject before volunteering so public an opinion.

A wise old sergeant once told me: “Wolf, opinions are like a**holes: everyone’s got one, and they all stink.”

The only way I would dare to correct that is to say that the more informed your opinion, the less it stinks. That is the lesson I will take from Ms. Cotillard and Ms. Jolie.

Steven Schwankert of Village Grouch fame wrote an excellent piece for IDG (picked up here in The Washington Post) describing how Chinese fans seeking to download illegal copies of Ang Lee’s excellent film “Lust, Caution” are finding on their hard drives not a copy of the film, but with software that pops a nasty little trojan virus into their systems.

There are several interesting aspects to this story.

Virus? What Virus?

First, it was apparently found and addressed by Kaspersky Lab and Rising Software well before it came up on the collective radar screens of Symantec, McAfee, and TrendMicro. One wonders why this is the case, particularly given that Symantec and McAfee tout the value of their software in part based on their global scanning for viral threats. I am especially concerned about TrendMicro, who have a huge presence in China and who make a great deal about their expertise as an “Asian” security company.

It also suggests that the malware threat in China is growing and diversifying. From dorm rooms filled with budding software engineers, to the challenges facing the country’s law enforcement teams, to the quiet but rapid growth of China’s cyberwar military-industrial complex, the country has become as much a haven and spawning ground for creators and distributors of Malware as the United States or any other country. This would seem to argue for greater investment by the computer security vendors in local labs who can not only find but anticipate new threats.

As an aside, it would also seem that companies like Symantec are destined to become major defense contractors. But we digress.

The Empire Strikes Back

Second, it seems that Hollywood (including the music and TV people as well as the film side of the business) and the software industry may have inadvertently discovered a way to slow online piracy and perhaps even the growth of downloaded content. All the studios – or, better yet, the MPA and the Business Software Alliance – need to do is hire a few good hackers to come up with some particularly nasty viruses and spread them around online disguised as illegitimate digital copies of random applications, movies, and music files.

Sure, the viruses would not deter the most determined or careful downloaders, and the anti-virus companies would inevitably come up with fixes. But imagine, for a moment, the fear, uncertainty, and doubt this would wreak among the less-expert. The mere possibility that these files would include viruses would be enough to drive a lot of marginal downloaders away from illegitimate downloading (and probably a few away from legit downloads as well).

Naturally I would expect clearer heads in the PR and legal departments of these organizations to prevail, ensuring that neither Hollywood nor the software industry would ever actually subsidize – or even publicly condone such practices. But you can easily imagine how such an option must tempt some people in places like Redmond and in the Black Tower.

Indeed, if the matter of digital rights management has proven anything, it has proven that Hollywood and many large software concerns believe that extremism in the defense of intellectual property is no vice, and that goodwill is readily sacrificed in that battle. If anything will keep hackers from high-powered lunches at the Ivy or the Fulton Fish market, it is the fear of court costs.

Nonetheless, it is fascinating, if not a bit disconcerting, to think that there is a commonality of interest between the creators of malware and the creators of movies.

Engineer, Engage the FUD Pump

What I do expect is that the IPR-driven industries will kick into gear a semi-coordinated propaganda effort to ensure that stories like the “Lust, Caution” become as widely known as possible, so that the threat is seen as being far larger and more serious than it really is. This costs them little, supports their goals magnificently, and enables the studios and developers to position themselves as defenders of the public interest.

Which, frankly, is the smarter way to handle it. You steal, you pay. Or, you pay, we protect.

For all the failings implicit in Hollywood’s approaches to the IPR issue and digital entertainment, let’s not lose sight of the most important fact – downloading illegal files is theft, theft is wrong, and anyone who does so willfully probably deserves a hard drive filled with malware.